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must be corrected here. In accordance with Articles 56 of the Contract Law, Articles 3 and 4 of the Company Law, and Article 153 (1)(b) of the Civil Procedure Law, it is so ordered:

1.Reverse and modify the judgment (1) in Shen Min (3) Chu Zhi No. 599 Civil Judgment of Shen Yang Intermediate People’s Court: Articles 6 (1)(a), 7 and 8 of the share transfer contract entered between appellant and respondent on September 29, 2000 are null and void, and the remaining provisions of the contract are valid and effective.

2.Affirm the judgment (2) in Shen Min (3) Chu Zhi No. 599 Civil Judgment of Shen Yang Intermediate People’s Court.

In addition, the RMB 31,010 Yuan litigation costs at the trial court shall be paid by appellant in the amount of RMB 18,606 Yuan, and by respondent RMB 12,404 Yuan. As to the appellate court costs of RMB 31,010 Yuan, appellant shall pay RMB 18,606 Yuan, and respondent RMB 12,404 Yuan. This judgment is final.

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Clearly, the High People’s Court of Liao Ning Province in Shen Yang International addressed the contract validity issue separately from the conclusion of the contract. In this case, the contract was duly concluded, but because certain contents of the contract smelled bad in terms of violation of the provisions of law, the contract had to be held partially invalid and therefore unenforceable. In addition, a practical importance of the Shen Yang International case was that partial invalid contract terms would not affect the validity of other parts of the contract if the invalid terms could be singled out.

1. Issues at Stake – Specially Addressed in the Contract Law

Given the significance of the validity of contracts, Chapter III of the Contract Law is specially designed to deal with all validity issues in light of effectiveness of contracts. Under the provisions in Chapter III of the Contract Law, a contract may be valid, void, or voidable with regard to its legal effect, or its effect may be subject to a further determination. Generally, a contract will be effective and enforceable if (a) it is made by the parties who possess the required legal capacity, (b) it is the product of real intention of the parties,2 and

(c) it does not violate any law or public interest. In addition, the effectiveness of a contract may also be affected by the conditions agreed upon by the parties.

The issues that may affect the validity of a contract involve several aspects. The most obvious aspect is perhaps the requirement of approval and/or registration. Normally, in accordance with Article 44 of the Contract Law, a legally

2As discussed, the question whether the real intention is the true intention or apparent intention of the parties is a matter of standard under which the intention is to be determined.

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formed contract without defects takes effect upon its formation (conclusion). However, as described in Chapter IV of this book, if an approval or registration for the contract is required, the contract will not become effective until the said approval or registration is obtained.

With regard to the approval or registration requirement, the Supreme People’s Court seems to be lenient as to when the approval or registration shall be obtained. In the words of the Supreme People’s Court, the parties may up to the conclusion of the court hearing in the trial obtain the approval or registration if required for the contract.3 In addition, according to the Supreme People’s Court, when the law or administrative regulation requires a registration for a contract, but does not explicitly provides that the contract shall take effect after the registration, the failure of the parties to obtain the registration shall not affect the effectiveness of the contract, but the ownership of the contracted items or other related property right may not be transferred.4

The following case explains the situation where the government approval is required for certain contract and how the requirement is enforced specifically.

He Nan Dayou Chemical Products Company Ltd.

v.

Shan Qian Fu Da Coal Mine

High People’s Court of He Nan Province5

Plaintiff, He Nan Da You Chemical Products Company, Ltd (Da You), is a company with its business address at No. 30 Chengbei Street, Hui Xian City, He Nan Province. Defendant, Shan Qian Fu Da Coalmine (Fu Da), is located at Shan Qian Village, Zhang Zhuang Township, Hui Xian City.

The case was appealed from the civil judgment of Xin Xiang Intermediate People’s Court concerning the dispute over the contract of join business operation between Da Yu and Fu Da. The facts of the case, as the trial court found, are as follows:

On December 13, 1996, Da Yu, through Da You Coal Mine formed by Da You, obtained a mining license from local authority. Prior to that, Da You made the investment on exploration of the coal reserves in several areas of Shan Qian Village. From June 1998, Da You started negotiating with Fu Da for a joint operation of the coalmine. During the negotiations, Da You provided Fu Da with the coal reserves materials collected by Da You during the coalmine exploration, and Fu Da copied those materials.

Thereafter, Da You and Fu Da orally agreed as follows: (1) the parties will invest RMB 12.5 million Yuan to form a joint coalmine, of which Da You will invest RMB 2.5 million

3See Supreme People’s Court, Explanations to the Questions Concerning Implementation and Application of the Contract Law of the People’s Republic of China, 1999, art. 9 (hereinafter referred to as “Explanations”).

4 See id.

5See, Judgment of High People’s Court of He Nan Province, (2003) Yufa Min 2 Zhong Zhi No. 47.

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Yuan or 20% of the total investment, and Fu Da RMB 10 million or 80% of the total investment; (2) Da You’s cost for the exploration will be priced at RMB 4 million Yuan and according to the investment ratio, Fu Da will refund Da You RMB 1.5 million; (3) the RMB 1.5 million Yuan refund will be made to Da You after Da You completes all information related to exploration and receives new mining license; (4) the joint coalmine shall be operated according to the “Charter of Coalmine” adopted by the parties, and after the joint operation starts, the name of the coalmine shall be “Fu Da Coalmine”; and (5) During the first two years after the profit-making year, Da You will not participate in dividend distribution and will also not bear any risk, and after that, the parties will share the profits and bear risk in proportion to their each investment.

Based on the above oral agreement and according to the requirement of the Bureau of Mining Administration, Da You submitted to the authority an application for canceling the registration of Da You Coalmine. From July 17, 1999 to July 27, 1999, Fu Da made three payments to Da You in a total amount of RMB 390,000 Yuan and no more payment was made thereafter. On December 30, 1999, the parties signed “Agreement of Joint Operation of Coalmine” (Joint Operation Agreement) that contained the terms and conditions of the above oral agreement, and the parties affixed to the Agreement with their official seals. On March 8, 2000, Fu Da registered “Fu Da Coalmine” (the entity for the joint operation) with the Provincial Bureau of Commerce and Industry, but the nature of the entity as registered was a collectively owned entity in the name of Sha He Village without consulting with Da You Chemical. On February 25, 2001, per the request of Sha He Village, “Fu Da Coalmine” was renamed as “Shan Qian Fu Da Coalmine”, of which Da You was not noticed.

On December 17, 2001, Fu Da obtained the new mining license, which showed that Fu Da’s scope of mining was expanded to include the mining areas of former Da You Coalmine, and Da You Coalmine was merged into Fu Da Coalmine. But after paying RMB 390,000 Yuan, Fu Da refused to pay to Da You the balance of RMB 1.11 million Yuan. Da You brought this lawsuit requesting the court to order Fu Da to continue performing the Joint Operation Agreement and to pay the overdue RMB 1.11 million Yuan.

The trial court held that the Joint Operation Agreement entered between the parties did not violate any prohibitive provisions of the law and should be held valid. The approval was not required because there was no evidence that the nature of the contract was to transfer the right of mine exploration. In addition, it could be seen from the document of the Bureau of Mining Administration that the Bureau knew and allowed the merger of the two coalmines, and therefore, the approval of the Bureau could be assumed. Although the Joint Operation Agreement did not mention the merger of the two coalmines, merger should be regarded as the basis on which the Joint Operation Agreement was made. In addition, after signing of the Joint Operation Agreement, Fu Da actually expanded its mining operation to the coalmine that used to be owned by Da You and made three payments to Da You according the Agreement. These facts demonstrated that the parties had performed their contractual obligation, which proved that the contract had taken effect. Therefore, the trial court denied Fu Da’s argument that the Joint Operation Agreement did not take effect because it was not approved by the Bureau of Mining Administration, which was required since the Agreement was to transfer of the right of mine exploration.

Fu Da argued that the Joint Operation Agreement was invalid because Da You did not have the right to explore the mine reserves, and the coal reserves materials obtained by Da You during its exploration were also invalid, which made it groundless for the parties to have the joint operation. By dismissing Fu Da’s argument, the trial court held that the question whether Da You had the right of exploration should be reported to the relevant

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administrative authority for a solution, but should not affect the validity of the Agreement. Under the Contract Law of the People’s Republic of China, the validity of a contract shall not be denied as long as the contents of the contract do not violate the prohibitive provisions of the State.

In its judgment for Da You, the trial court ruled that (a) the Joint Operation Agreement entered by the parties was valid and the parties should continue performing; (b) within 10 days after this judgment was effective, Fu Da should pay Da You RMB 1.11 million; and (3) the litigation fee of RMB 15,560 Yuan should be paid by Fu Da.

On appeal, Fu Da argued that the trial court erred in finding the validity of the Agreement and in determination of the nature of the Joint Operation. The Joint Operation Agreement was in fact an agreement to transfer the right of exploration, the right of mining as well as the sale of mineral reserves. In accordance with the “Law of Mineral Resources” of China and relevant administrative regulations, only the geology and mineral resources departments of the State Council and provinces have the right to examine and approve the transfer of the exploration and mining rights, and the materials of exploration may only be used after approval by the mineral resource reserves commission of provincial level or higher. The merger of two coalmines must also be approved by the provincial mining administrative authority.

Fu Da further asserted that since Da You did not have the right of exploration, the exploration materials collected by Da You could not be used, and by using the illegal exploration materials to form a joint operation with Fu Da, Da You purposed to seek exorbitant profits. Therefore, the Joint Operation Agreement was invalid because it concealed illegitimate purpose. Even if the Joint Operation Agreement was valid, because Da You’s illegal exploration activity was irreparable and it had lost capacity to perform, Fu Da had every reason to rescind the contract unilaterally. Fu Da also pointed out that the trial court’s finding that the negotiations between the parties started June 1998 was erroneous because the parties did not negotiate until summer 1999.

It is found by the Appellate Court that Fu Da and Da You negotiated the joint operation matter in summer 1999 and the Agreement of Join Operation was concluded on December 20, 1999, and the trial court’s finding of the negotiation in June 1998 was a clerical error. It is also found that at the time of the Agreement, both Da You Coalmine and Fu Da Coalmine all had legal mining licenses, but no exploration license. According to Da You’s explanation, at that time, Hui Xia local geology and mineral resources administrative authority did not give the exploration license to any of coalmines in the area of Hui Xia.

From what has been found, the Appellate Court is of opinion that given the actual situation at the time of contract, the issuance of mining license by Hui Xia local mining administrative authority to Da You should be deemed as an acknowledgement of Da You’s exploration activity by mining administrative authority though Da You had no exploration license. On this ground, Da You’s exploration materials shall be regarded as being obtained legally. In addition, it is reasonable to conclude that both Da You’s investment in the exploration and the result of the exploration constitute Da You’s legitimate property right. There is no violation of the law with regard to the agreement between Da You and Fu Da to price the property right at RMB 4 million Yuan, of which RMB 250 was used as investment to form the joint operation of mining with Fu Da.

It is therefore held that the Agreement of Joint Operation is valid and enforceable. The contents of the Agreement tell that the form of the join operation is a joint venture for establishing a new coalmine, a transfer of exploration and mining rights. Although the merger of the two coalmines was not approved by provincial authority, it was approved by Hui Xian local mining administration authority. Also although the provincial approval is